Dr. Alan O'Sullivan

I already mentioned this idea that we find optimism, great optimism by equity analysts and investors at times like 2000 when we had had a rear view of very strong performance, so very strong earnings growth and actual asset returns.

And again, there's that flavor also in recent years that we have had this strength.

And so that's an example of over-extrapolative expectations.

Actually, long-run analysis does suggest that, for example, abnormal growth

can last typically a couple of years, but not more than that.

But markets tend to think that it can be 10 years or more than that and price things accordingly.

And sometimes it works like with Amazon and Microsoft and so on, Google, but most of the time it doesn't and that leads you to bad investment results.

But anyway, we do find that in equities, it's quite common to be extrapolative.

So then it was very interesting when I started to sort of go back to my old love.

I was originally a bond guy, so thinking about bond yields and interest rate expectations.

And there's a pretty famous pattern known from 2010s that while treasury yields were falling and falling most years,

there was always an upward sloping yield curve or concentric forecasts of economists were saying that rates should go higher and yields should go higher from here.

And it just became almost a joke that how can they make the same mistake year after year?

And now, with hindsight, there is some academic research that says that it really –

made sense even though it turned out to be a wrong expectation until 22 when it happened in spades we got rising yields very sharply at that point but basically we had had this multi-decade decline in yields

And sort of logically, rationally, the right thing to do was to expect some normalization, mean reversion.

And that's what markets were doing always.

And by the way, then when rates rose in 22 years,

Then we went from upward sloping yield curves to inverted yield curves and falling rate expectations.

So it turns out like we find that cyclically those forecasts and yield curve shapes had correct type of predictions, but they totally missed this persistent decline in bond years.